AAPL Trade Idea #3: An AAPL LEAP Calendar Spread

• stevenplace
• January 16th, 2009

Here’s the final installment in my omg-steve-jobs-is-dying-noone-will-buy-iphones trade. These are bullish contrarian plays so you need to manage risk accordingly. This final strategy is a little more risky and requires some better stock timing. I’m highlighting the overall strategy, so although there are specific price points they may not be the best entries or exits.

Buy AAPL Jan 10 85 Leap Call 16.80 or better

This puts you in around 58 shares (the delta risk), so it’s about 2.5x leverage to stock. There’s little time decay as it is so far out and you can make a lot of money to the upside.

But that’s not the point of the play.

The point of the play is to sell front month options against your position to get into credit spreads. The idea is to have time decay eat up as much extrinsic value on the front month that it will practically pay for itself. So with our example the front month option is running about 4.50, all extrinsic. So with the most ideal situation you would pick up about 4.00 of extrinsic each month, and with 11 months to go that’s 4400 dollars. When your initial capital outlay is 1680, that’s over a 250% return on your position, not including any gains from share appreciation.

This position is *very* tricky in that you have to actively manage it by trading the front month call around. So right now if I got in at this price I would actually wait until the stock price filled the gap around 84.50, and then I would sell the front month, which would be around 6.20 for the front month. If the stock weakened further, then you can buy it back and trade like that.

Do note that this trade is for advanced traders only and you should be fairly decent at timing the market on an intraday basis.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: aapl

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